Throughout the year, businesses undertake great strides for retaining business records in anticipation of annual tax filing and the possibility of a CRA audit.
But once the yearly filing is done, what do you do with those records? Leave them taking up space on your shelf? Perhaps it feels like that’s what you’re doing, but there are some best practices to guide you on which records to retain and how long to keep them.
Why You Should Care About Retaining Business Records
Retaining business records is not just a business best practice — it’s the law.
Canadian law requires you to retain business records and make them available to a CRA representative upon request. There are penalties and/or sanctions if you fail to:
- Keep adequate records
- Provide CRA officials with access to your records, when requested
- Give information to CRA officials, when asked
What Documents Qualify as a Business Record?
CRA requires you to keep records of all your transactions to support your income and expense claims.
Records include ledgers, journals, vouchers, financial statements and accounts, and income tax and excise tax records.
Records are substantiated by supporting documents that provide documentary evidence of transactions. Supporting documents include, but are not limited to the following:
- Sales invoices
- Purchase receipts, contracts
- Bank deposit slips, cancelled cheques
- Cash register slips, credit card receipts, purchase orders
- Work orders
- Delivery slips
- Emails and general correspondence in support of the transaction
Of course, the CRA may disallow your expense claims if you are unable to provide the record of the transaction.
How Long Should You Retain Business Records?
For tax purposes, the CRA requires you to retain your financial records and supporting documentation for a minimum of six years after the end of the taxation year that they cover.
Exceptions to the Six-Year Rule
Not every tax return is as cut and dry as the on-time, no-audit and no-dispute tax returns that we all aspire to achieve. So there are exceptions.
For taxes that are filed late, the years are not counted from the end of the taxation year, but rather from the date the taxes were filed.
If you have tax returns for which there are objections or appeals, the records for these years should be held until the process is resolved.
There are instances where you can destroy your tax records prior to the six-year limit, if you have written permission from the Canada Revenue Agency. The form to use is T137 – Request for Destruction of Books and Records.
Where Should You Retain Business Records?
The CRA requires that you hold your records at your business premises or residence in Canada, unless you have written permission to hold them elsewhere.
Today’s business environment is well into the digital age, and most companies create and hold their records in electronic format. Electronic record keeping includes the records produced by business systems such as:
- Accounting software, both custom and commercial solutions
- Point of Sale (POS) systems
- Internet-based electronic commerce (e-commerce) systems
- Electronic purchasing and restocking systems; and
- Income tax and GST/HST returns preparation software.
Electronic records may be stored on a computer, a network of computers, or computers held by third parties. They can also be stored on diskettes, CDs, DVDs, tapes, or cartridges.
The computers and other storage devices may be located on your premises or elsewhere if the business or other organization operates in a Local Area Network or a Wide Area Network environment. The electronic records may also be maintained on a computer file server or on server space that is outside the premises.
As with all matters in business records, the key is getting organized and being prepared.
You have invested too much time, energy and money into your company to have a setback due to poorly held business records. Make sure you know what CRA expects from you and how retaining business records can keep your company in compliance.